Friday, May 13, 2011

Hydrocratic dreams: Using hydro-dollars to mitigate our trade deficit is a mirage

Nepal’s balance of trade deficit in the last fiscal year (2009-10) was Rs213 billion; annualized linearly it amounts to Rs320 billion. It was only Rs216 billion the year before. A whopping 48% increase! Our balance of payment was also unfavorable by Rs1.95 billion during the same period (Rs2.92 billion for the year). It was favorable by Rs38 billion the previous year. These indicate that the country’s economy has taken a turn for the worse!

One doesn’t need to be a Nobel laureate economist to deduce that Nepal is technically insolvent and diagnose reduction of these to forestall bankruptcy. The business community, renowned economists and the “hydrocracy” (politicos, bureaucracy, intelligentsia, etc. involved in hydropower) argue that the only way out is to export hydropower. Susan Goldmark, the World Bank country director in Nepal, lent credence to this diagnosis by declaring that Nepal’s GDP could be comparable to that of Saudi Arabia if we exported hydropower; due to which the clamor for hydro-dollars reached a crescendo.

Actually, it is because Nepal for the past two decades concentrated on projects to export hydropower that we are suffering an energy crisis (in both electricity and petroleum products) and have been relegated to the status of net importer of even electricity. The situation will get worse unless policymakers understand that there is much to it than meets the eye and refocus and realign the country’s comprehensive energy policy.

Nepal’s famed economic potential of 43,000 MW will generate 188 billion kilowatt-hours (units) of electricity if implemented at 50 per cent average plant factor (which ranges from 20-25 per cent for storage projects to 65-70 per cent for run-of-the-river projects). Exporting at 5 ¢/unit (the rate for peak-in West Seti power that India’s PTC agreed to) will generate a revenue of $ 9.4 billion/year, which doesn’t bring Nepal anywhere near Saudi Arabia, whose GDP even in 2006 was $ 309 trillion (source: www.nationmaster.com/), impelling one to wonder whether Ms Goldmark did check her facts before pontificating.

Superficial look at the quantum of potential hydro-dollar has made people to jump to the conclusion that exporting power will mitigate Nepal’s balance of payment deficit; which is far from true. Even at a low ballpark cost of $1,000 per kilowatt, implementing 43,000 MW will entail an investment of $43 billion which is beyond Nepal’s means. The only alternative is to build with foreign direct investment which will also mean that almost all of the hydro-dollars will get repatriated from Nepal as return on investment and debt service, except for royalties to be paid to the government (income from hydropower neither attracts income tax nor is electricity VAT-able) and a small amount spent on local salaries; a substantial portion of which will go for expat wages. The operation and maintenance cost of such projects and corporate overheads will also not stay in Nepal. Only about three percent of the hydro-dollars we generate from exporting hydropower (about $282 million) will actually stay in Nepal, and will help ease our balance of payment deficit to that extent only. Rest of the hydro-dollars is merely statistics for Nepal; inflow and outflow simultaneously.

At least statistically, balance of trade will become favorable by the quantum of hydro-dollars; but it requires a closer scrutiny. A country’s economy benefits from value addition due to increased export manifest in favorable balance of trade, triggered by augmented employment as a cascade impact of industrialization necessary for incremental production for export. But in the case of hydro-dollars, value addition will not be commensurate to export; it will rather be limited by the quantum of percolation into Nepal’s economy. Ninety-seven percent of hydro-dollars flowing out of the economy will not meaningfully add value, will neither increase industrialization nor generate employment.

Therefore, Nepal’s priority should be to use hydropower for value addition and to wean ourselves from our dependence on imported petroleum products (which aggravates the balance of trade and payment deficit and causes Nepal Oil Corporation to hemorrhage) to the maximum possible extent by electrifying the public transportation system (also generating carbon offset benefits) thereby ensuring overall energy security (not just in terms of electricity). We must also aim to supplant the use of animal and agricultural residue and firewood which cause indoor pollution that reduces the productive life of, mainly, women, by clean hydropower. We, further, should not just use the electricity to drive the economy to attain normal economic growth rate contrasted to currently prevalent suppressed growth rate but also to achieve accelerated growth rate.

However, it doesn’t mean that hydropower shouldn’t be exported at all. But it would be foolish for Nepal to have projects built to export at around Rs2 per unit, and import at over Rs10 in the name of reducing load shedding problem in Nepal and simultaneously perpetuate our dependency on imported petroleum products. The country’s best interest will be served by buying electricity at the lowest rate from developers capable of building projects cost effectively, and use the electricity to meet our own demand to supplant non-renewable and unclean sources Nepal, not the project developers, should export the remaining electricity at premium price, because demand and price in India is highest when Nepal “spills” energy (wastes generation capacity), during the monsoon.